The Associated Press reports on Michigan state Rep. Alma Wheeler Smith’s proposal to restructure her state’s tax code in order to raise $6.5 billion. Here are some of the highlights:
– Extend the sales tax to services and reduce the overall tax rate from 6 percent to 5.5 percent.
– Eliminate the 22 percent surcharge on the Michigan Business Tax.
– Replace the state’s 4.35 percent flat income tax rate with a graduated income tax rate of 4 percent for individuals making zero to $45,000, 7 percent for individuals making $45,000 to $60,000 and 9.75 percent for individuals making more than $60,000 (income brackets would be doubled for joint filers). Some of the tax would be offset for those who itemize deductions on their federal income tax forms.
– Eliminate $3 billion in business tax exemptions.
– Create a new income tax credit that would cover all tuition paid to state universities, community colleges and vocational schools. The credit also would apply to preschool costs.
– Set aside $500 million from the elimination of the business tax exemptions for public education, erasing all the cuts made this fall.
The three glaring points include the elimination of business tax exemptions (which will raise the effective tax rate for businesses), creation of a more progressive tax system (which will punish production), and guarantee of free education for Ameircan citizens.
Any rise in taxes for business is of course a terrible idea for multiple reasons. The first is that the less income a business has, the less money it has to spend on new jobs and capital investments (i.e. those things that would increase the quality of life for Michigan residents). The second is that it will provide incentive for businesses to relocate to other, lower-taxing states and discourage new businesses from forming in Michigan.
Apart from undermining individual liberty, a progressive tax system punishes production and discourages economic growth by discouraging capital investment. Call it supply-side or trickle down economics if you’d like, but a slanderous name does not render these basic economic principles false.
Finally, education is a scarce good. There are not enough facilities, teachers, etc. to provide every single person with a college degree. Granted, this may (and hopefully will) change over time, but the supply of education would – in a free market – gradually adjust with increasing demand as quality of life improves and more consumers can afford it. But with a price ceiling effectively set at $0, there will be shortages in the supply of education because of the artificially low demand. This is econ 101 – price ceilings create shortages. A tax credit for education means that an individual will be able to deduct the entire cost of education from his final tax liability, rendering the cost of education $0 by the time all is said and done. And none of the above reasons against free education even touches on the questions “by what right?” and “at whose expense?” (Ayn Rand, Capitalism: The Unknown Ideal)
Michigan, by no stretch of the imagination, has a fantastic record when it comes to its tax code. But this proposal goes so far that “stupid”may be the only appropriate description.